Editorial: Bentley targets tax loophole

Two of Alabama's most formidable lobbies are brawling in Montgomery over closing a business tax loophole, a move that would increase revenue by millions of dollars a year for the state school budget.

During his campaign for governor last year, Dr. Robert Bentley said he would work to close some tax loopholes if he were elected. A rule his administration has proposed would close a loophole available only to a relative handful of companies that operate in Alabama and other states. State officials estimate changing the rule would bring in about $30 million in additional revenue during the first year the rule takes effect and $17 million a year thereafter.

A hearing on the proposal will be held May 5 in Montgomery. Bentley can use an executive order to make the change. It will not require the Legislature to pass or amend a law, unlike 12 new bills House Democrats said Wednesday would raise $200 million a year by closing " the worst loopholes" used by out-of-state corporations.

The Alabama Education Association is backing those bills and Bentley's proposal because the extra money would help forestall the loss of hundreds of teacher jobs through attrition. State corporate and individual income taxes are earmarked for teacher salaries. Legislators and other state officials are debating whether it would be better to cut teachers' pay by steps such as cutting their work days, shortening the length of the school year and reducing the money the state gives school systems to run their buses.

The Business Council of Alabama opposes Bentley's rules change and can be expected to fight it and the new bills tenaciously. Discussing Bentley's plan early this week, the BCA told its members in an email that the proposed rules do not provide tax credits for franchise taxes paid in other states or taxes paid in other countries.

"While we understand Alabama's dire budget situation," wrote BCA President William Canary, "we certainly don't believe anyone expects the state's budgets to be balanced on the backs of the private sector, which is still facing a nearly 10 percent unemployment rate in Alabama."

Officials at the state Department of Revenue say the change would not affect big box retailers or publicly traded corporations, or small businesses operating only in Alabama. The companies facing higher taxes are "S" corporations, usually medium-size, closely held firms based in Alabama, and partnerships such as limited liability corporations that also operate outside the state. These firms don't report income earned in other states but deduct from their Alabama taxes all the federal income tax paid on out-of-state income.

According to the Revenue Department, the owners of these businesses in Alabama don't have to pay any Alabama taxes if the portion of their business in this state is less than their federal taxes. And Alabama is the only state that allows this deduction, according to Rebekah Mason, Bentley's chief spokeswoman.

State tax officials estimate most of the revenue from the change would come from fewer than 100 companies in a variety of businesses, including law and accounting firms, and retailers.

According to recent figures from the Tax Foundation think tank in Washington, D.C., Alabama in 2008 ranked 37th nationally in the amount of state and local corporate income tax it collects per capita, $113. Among Alabama's border states, only Georgia was lower at 41st at $98. Florida ranked 34th and collected $120 per capita. Mississippi, ranked 29th, collected $131, and Tennessee, ranked 18th, collected $162.

Perhaps the loophole could be justified if Alabama's corporate tax rates were seriously out of kilter. But that hardly seems to be the case. And if this particular loophole is not available to similar companies in other states, it certainly doesn't seem necessary that it be continued here. Indeed, the figures from the Tax Foundation, a conservative outfit, seem to suggest there might be a little room to ask business to pay a little more.

By Mike Hollis, for the editorial board. Email: mike.hollis@htimes.com